Michael Goldstein – Becker & Poliakoff, LLP
Zachary Parker – CEO, President and Board Director
Kathryn M. JohnBull – CFO
Richard Greulich – REG Capital Advisors
DLH Holdings Corp (DLHC) F1Q 2014 Earnings Conference Call February 6, 2014 11:00 AM ET
Good day, Ladies and gentlemen, and welcome the Quarter One DLH Holdings Corporation Earnings Conference Call. My name is Julian, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.
I would now like to hand the call over to Mr. Michael Goldstein, please proceed sir.
Thank you, Julian. Good morning, everyone, and thank you for joining us for today's conference call. I am Michael Goldstein, partner with Becker & Poliakoff, LLP, counsel to DLH Holdings Corp.
Before we begin, the substance of our call, I'd like to make a few brief introductory comments. Earlier today, the company posted its earnings release which outlines the topics that management intends to discuss today. Should you have missed that release, it can also be found on DLH's corporate website at www.dlhcorp.com.
Additionally, as part of today's call, we have created a slideshow presentation which can also be accessed on the DLH website. Go to the Investor Relations tab towards the right side of the page and click on Presentations under the dropdown menu.
The company is also providing a simultaneous webcast of today's call and the replay of this conference call will be available later today. Please note that this conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this conference call regarding DLH Holding Corp's business, which are not historical facts, are forward-looking statements that involve risks and uncertainties.
These statements reflect DLH's current views and are subject to important factors that could cause its actual results to differ materially from anticipated results as a result of various risk factors and uncertainties. Factors that could cause DLH's actual results to differ materially from those that anticipate are summarized in our earnings release filed earlier this morning and are described in the company's Securities and Exchange Commission filings. The company's safe harbor statement is also included in the presentation and should be incorporated as part of any transcript to this call.
DLH expressly disclaims any current intention to update any forecast, estimates or other forward-looking statements contained in this call. In addition, the company's presentation today will include discussion of non-GAAP financial measures and these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.
With all that said, it is now my pleasure to turn the call over to Mr. Zach Parker, President and Chief Executive Officer of DLH Holdings Corp, Zach.
Excellent, thank you, Michael. Good morning and welcome to our shareholders and other interested parties. We appreciate your participation in today’s conference call and webcast.
Joining me on the call today is Kathryn JohnBull, Chief Financial Officer of DLH Holdings Corporation. I want to start today’s briefing with the acknowledgment of the great work being done by DLH Management and our workforce. I’m extremely proud of the work that everyone has done and the dedication in enhancing our program execution for customers during these very difficult budgetary times for the government.
It is our past performance excellence that allows us to compete on a basis of value, our entered spend backlog and at the same time grow our revenue. This quarter marks the fifth consecutive quarter of revenue growth which is particularly noteworthy given the federal budget environment.
As indicated earlier, today we posted our first quarter fiscal 2014 financial results. Our first quarter sustains our recent trend of delivering increased revenue in gross profit, while continuing to apply strong controls to G&A expenses.
Revenue grew 11.4% over the prior year first quarter and gross profit grew 18.1% over the same period while we simultaneously continued to improve our working capital position and Kathryn will discuss that in additional color there later. We believe that our results valued our strategy as we continue to shape our portfolio in a manner which enhances shareholder value not only long-term, but near-term as well.
I would now like to make a few comments about the current federal budget environments. Since we last spoke in December, congressional budget deliberations were completed on a few related appropriation bills for 2014. These efforts resulted in a spending bill necessary to fund the government through 2014. These efforts were also culminated with the signing of these appropriations into law by President Obama.
This law establishes new spending levels for DOD and civilian agencies including the Department of Veterans Affairs. In effect it restores some of the sequestration related cuts for the next two years. It further allows agencies to reallocate their funding to align with what they considered to be their top priorities. The Department since budget basically remains at a 2013 earning levels, what we would characterize as relatively flat.
While specific budget allocations have not been finalized by each of these agencies, we continue to see and hear evidence of government commitment to our key growth areas. The help and readiness of our service members and veterans remains a top priority for our nation. Further, we expect that the readiness of our defense systems will also get a boost as a result of this recent budget agreement.
Kathryn will now provide in more detail discussion of our financial results, Kathryn.
Kathryn M. JohnBull
Thank you, Zach, and good everyone. Revenues for the three months ended December 31, 2013 and 2012 were $14.5 million and $13 million respectively, which represents an increase of $1.5 million or 11.4%, notwithstanding the extended government delays and major program awards. The increase in revenue is due primarily to new business awarded throughout 2013 and expansion on current programs.
Gross profit for the three months ended December 31, 2013 and 2012 was $2.1 million and $1.8 million respectively, which represents an increase of $0.3 million or 18.1%. As a percentage of revenue, gross profit was 14.6% and 13.8% respectively for the three months ended December 31, 2013 and 2012, respectively. The gross profit rate benefited from new business awarded in 2013 and improved contract performance and cost management.
G&A expenses for the three months ended December 31, 2013 and 2012 were $2 million and $1.8 million respectively, an increase of $0.2 million or 9.2%. Non-cash stock option expense was a significant contributor to the increase in G&A expenses, as those costs were $0.2 million and $0.1 million for the three months ended December 31, 2013 and 2012 respectively. As a percentage of revenue, G&A expenses were 14% and 14.2%, for the three months ended December 31, 2013 and 2012, respectively.
Income from operations for the three months ended December 31, 2013 was approximately $66,000 as compared to a loss from operations for the three months ended December 31, 2012 of approximately $94,000. This improvement in income from operations results from improved gross profit resulting from contract performance.
Other income, net was $67,000 for the three months ended December 31, 2013 as compared to expense of $34,000 for the three months ended December 31, 2012. This improvement is due principally to a gain recognized on the maturity of our derivative financial instruments associated with our convertible debentures.
Net income for the three months ended December 31, 2013 was $133,000, or $0.01 per basic and diluted share, as compared to a net loss of $128,000 or a loss of $0.01 per share basic and diluted share for the three months ended December 31, 2012. This improvement in net income result is due principally to the increased gross profit previously discussed.
Adjusted EBITDA for the three months ended December 31, 2013 was $309,000 as compared to $29,000 for the three months ended December 31, 2012.
Moving onto the company's capital structure we are very pleased with the significant improvement to working capital that we achieved during the quarter. We substantially narrowed our working capital deficit by $1.7 million from a $2 million deficit at September 30, to a $0.3 million deficit presently as a current public load (ph.).
Key events that contributed to this progress include a refund of $1.03 million of cash collateral that had previously been provided to secure contract performance, which we were able to get released based on our issuance of a letter of credit under an amendment to our existing credit facility. Secondly, we received a capital contribution of $323,000 from our largest shareholder related to the retirement of convertible debentures and the exercise of the related warrants for those debentures. And of course, adjusted EBITDA for the quarter of $309,000 as an indicator of cash results of operations improved working capital by $309,000. We believe that our business model should deliver a working capital surplus overall and we are committed to achieving that objective in the very near-term.
While cash flow was used in operations for the quarter standalone, this was driven by growth in accounts receivable as compared to September 30, 2013 and occurred based on the timing of client payments. For the quarter ended in September, key client payments were collected more quickly than expected under the provisions of the contracts. Therefore, for the current quarter, those payments returned to more standard contractual payment terms, causing growth in receivables overall within the quarter. For both periods, however, collections were well within contract terms.
Setting aside receivables related to the potential contractual billing adjustments which were $9.3 million in both periods, the DSO related to receivables was 24 days for the three months ended December 31, 2013 as compared to 17 days sales outstanding for the three months ended September 30, 2013. Fundamentally, we believe our business model has cash generating and should result in positive cash flow from operations overall, although from period-to-period there maybe use of cash during periods of revenue growth.
As of December 31, 2013, the company had $2.6 million in cash and $1.1 million in loan availability. The company believes it has adequate liquidity resources to fund operations and support growth over the next 12 months in view of its existing cash position, the additional funding committed by the company’s lender and the forecasted cash flow from operations.
We’re pleased to have achieved our first quarter financial objectives, we believe we’ve implemented an operational model that can sustain this progress and that can scale as the company grows.
That concludes my discussion of the financial statements; I’ll now turn it back over to Zach.
Thank you, Kathryn. In summary, DHL continued to successfully execute our strategy while we reshape our business portfolio and invest in growth in key national priority programs. Next week, we will conduct our annual meeting of the shareholders in New York and we will provide additional color to the budget and our strategy.
With that I would like to turn the call over to our operator to open the call for questions. Thank you.
Thank you. (Operator Instructions) Your first question comes from the line of Richard [indiscernible] Partners, please proceed.
Good morning. I’m new to your company and have two questions. One is, how are reshaping your new business portfolio, could you describe what’s new and different. And the second question is, just as I was getting to look at you back in early January, the stocks sort of doubled very quickly without any visible news could you talk about what happened there that I am missing?
Yes, I will cover a little bit of both and I’ll pass the later one to Kathryn since she is going to get some call from NASDAQ every time we do this. I appreciate as I hate those anyway. Good question, Richard. First of all I appreciate you and Langford Partners and your interest in DLH, very good question. We are reshaping a bit. We are not abandoning any facility. We are shaping kind of the priorities in our portfolio of new business. Over the last few quarters we talked a fair amount about our pipeline and how important our new business pipeline is to growth and of course as we continue to keep you abreast on the changes in budget environment from the Federal Government, it's incumbent upon leaders of companies like ourselves to make sure that we are aligning our investments and our new business to keep in touch with our strategic objectives and the budgetary environment.
So, let me just give a little color to both of those pieces. In terms of the budgetary environment, it's very important to make sure that we are perusing in chasing and shaping our growth around programs that are going to have real money; real money this year and several programs are being cut; over the last couple of years a number of those have been either been reduced or canceled. And so, it's important that we keep our ball focused around really with coming years, and so a lot of our, you may find a lot of our peers and our benchmark kind of companies are starting to adjust their guidance downward by lower to mid single digits as a result of that budgetary environment. So, we are very fortunate that with capturing ourselves, John Armstrong, my Executive Vice-President and some of our strategic market advisers we’re able to make sure that we can shape our pursuits around that which is well funded. And the Veterans Affairs as an example is a very strong, strong budget funded environment. So that’s why we do some shifting. I can't tell you, we are going to talk a little bit more about this next week with the shareholders but the heath care point of that environment is also very strong, viable one for us and we’re going to continue to amp up that part of our portfolio. Okay. With regard to the...
This is non-government health care you are talking about?
Well, interestingly to mention there is no, tight now we are looking at government both Federal agencies and including the Department of Defense. It's a very, very large and addressable budget environment for us and market for us. And we are doing the spade work today to make sure that we can have substantial growth in that area. It's important to us also because as you just tuned in to DLH story, a couple of years ago we laid out at LD Micro conference, kind of our three-lines of business. But the health care piece is clearly one that will help us, allow to move up the margin, increase the margin side of the business and some of our recent new wins are starting to help us substantiate our pursuits in that market and we can [indiscernible] in that ground work for some continue down that path. The first part of your question had to do with the spike. I can just tell you there was no new news but let me turn it over to Kathryn to address that.
Kathryn M. JohnBull
There are a couple of things Richard and welcome; we appreciate your attendance on the call. Naturally as we believe, we have reached that point where we developed a sustainable model that would deliver quality results. We have naturally become more active in reaching out for investor developments. So, we think perhaps that did some – contributed somewhat to the additional attention in early January and then the other factor I think that plays is that we did really start our FY’13 results in December and while our most portfolio managers have fairly consumed with balancing their clients tax positions at the end of the calendar year, we do think people had a chance to cut up, turn back to forward-looking items in early January. They picked up, perhaps picked up our releases from mid December and started to think about in that way. So those are kind of the things we are thinking about that would have contributed to a bump in the stock price in early January.
Okay. Thank you very much.
Thank you, Richard.
Thank you. We have no questions at this time. (Operator Instructions) We do have a question and it comes from the line of Richard [indiscernible] please proceed.
Well, if no one else is going to ask anything, so you don’t do any corporate or non-governmental business, am I assuming that correctly or you are not focused in that direction at all?
Very appropriately on the latter, we are not focused at all strategically around non-government business. Occasionally there maybe company that we are looking at doing some business for and to that is not our strategic direction for growth however. That’s not to say that at certain deals present themselves that we do not entertain those because we do. Some of them are commercial in nature, but you will never find a sizable chunk of restructuring of our company or investment, our discretionary dollars going in that direction in the near term.
So, there are those that ask the question with regard to health care whether or not what's happening on the Federal government side and commercial side, whether or not that presents an opportunity for us and why we are not focused largely in that area, there certainly maybe some adjacencies at appropriate time that we will consider but it is not strategic alignment.
Right. Okay, thank you.
Good question, Rich.
Thank you. Our next question comes from the line of [indiscernible] Business Consultant. Please proceed.
Hi, I have a question on the Form 10-Q, it shows that we are still carrying the $6.8 million of goodwill on the balance sheet. However, in the text on page 8, it says that if we ever had to take an impairment charge, it could be a charge of up to $8.6 million. Is that just a typo, should that have been $6.8 million instead of $8.6 or could be the impairment charge actually be larger than the goodwill itself?
Kathryn M. JohnBull
No, the goodwill is $8.6 million and that’s just related to the current operations of the government sector.
And what's the likelihood that in the next year we may have to take an impairment charge against that?
Kathryn M. JohnBull
Well, we do, do an annual evaluation of that and it's required for our annual audits and so we have very recently evaluated that, that goodwill is derived from the underlying health of the business that we operate for that in the government space and so we view that goodwill as not we’ve evaluated as not impaired as of September 30th and no event has happened subsequent to that, that would cause us to expect that there is any impairment to that.
Okay, thanks very much.
And Burton, very good question, let me also add that impairment task we do, we go outside and have independent redone for us as well.
Thank you. Okay.
Thank you. Our next question comes from the line of Richard Greulich, REG Capital, please proceed.
Richard Greulich – REG Capital Advisors
Hi, Jack and Kathryn, good morning. When you mentioned on the presentation about you are going to be scheduling some mini conferences in a couple of different areas, for the New York one, do you have any kind of timeframe you are looking at there to narrowing in on?
Good question Richard. We’re doing a good read ahead. So, I appreciate that taking a look at the presentation online. We are in the process of working those dates. You know, of course, with New York we are going to be there next week just for the annual meeting. So probably the follow up to New York will probably be a little later. Right now Kathryn and I, have the other day we are looking at probably Chicago being first, is that correct? And then probably the west coast and then followed by New York, but the dates are just fluid. Our objective is to make ourselves more accessible, more available.
I think when you go back to the first Richard's question, you know lot of, we find that we are starting now that we have become approaching profitability we are starting to approach, to enter some of those radar screens for folks looking at micro and small cap environment. So it's important we think that we get out there and tell the story. There is no lamer reason to the sequencing of the calls of the mini conferences other than we want to make it compatible with some of our other travel arrangements.
Richard Greulich - REG Capital Advisors
Right, okay, thank you.
Thank you. We have no questions at this time. I would now like to turn the call over to Zach Parker for closing remarks.
Thank you, Julian. And thank you all for participating in today's conference call. Should you have any additional questions please feel free to contact Kathryn and myself. We thank you for your interest and support and look forward to speaking with you again in the coming months as we report on our FY’14 second quarter results. Thank you.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.